Damages for late payment: will COVID-19 set the first precedent?
On 4 May 2017, the Enterprise Act 2016 came into force and amended various sections of the recent Insurance Act 2015. In particular, it inserted a new section 13A to imply a term into every contract of insurance that if the insured makes a claim under the insurance contract, the insurer must pay the sums due in respect of the claim within a reasonable time, failing which the insurer may be liable to pay damages. Three years later, there are no reported cases dealing with section 13A, but with the litany of disputes and the chaos arising out of COVID-19, the English courts may now be asked to address it.
Important points to consider
There are a number of important points to consider in relation to a claim for breach of section 13A of the Insurance Act 2015:
What is a reasonable time?
The Act does not define what is a reasonable time, but states that it includes “…a reasonable time to investigate and assess the claim”. What is reasonable will depend upon all the “relevant circumstances” and the following are examples of matters which may need to be taken into account, including:
- The type of insurance. For example, claims for business interruption usually take longer to value than property damage claims.
- The size and complexity of the claim. Larger and more complex claims usually take longer than simpler and more straightforward claims.
- Compliance with any relevant statutory or regulatory rules or guidance. See, for example, rule 8 of the FCA’s Insurance: Conduct of Business sourcebook on claims handling, and paragraph 27 of Schedule 1 to the Consumer Protection and Unfair Trading Regulations 2008 (SI 2008/1277) concerning commercial practices in all circumstances considered to be unfair.
- Factors outside the insurer’s control. One of the factors outside of the insurer’s control may currently be said to be COVID-19, which may be said to have impacted upon claim investigation and assessment. Other examples may include delay in a policyholder providing relevant information, or awaiting information from third parties.
As is typical when concepts of reasonableness are involved, the answer is fact specific in any one case.
Where the insurer can show that there were reasonable grounds for disputing the claim (whether as to the amount of any sum payable, or as to whether anything at all is payable), the insurer will not breach the implied term by failing to pay the claim or the affected part of it while the dispute is ongoing, but the claims-handling conduct of the insurer will be a factor taken into account when deciding whether the term has been breached and, if so, when.
Again, there is no guidance as to what constitutes ‘reasonable grounds’ for disputing a claim. In most cases, one would expect insurers to only dispute a claim based upon reasonable grounds, particularly after having taken external legal advice. At times like these also, there will be arguments that are finely balanced and/or untried and untested, but this should not inhibit insurers from pursuing them. Even where an insurer loses a case, this does not mean that it pursued unreasonable grounds. However, before running such a defence an insurer will need to consider whether it needs to (or indeed may have to) waive privilege and/or confidentiality in relation to certain (perhaps sensitive) documents in order to prove that its grounds were reasonable.
Causation, remoteness and quantum
There will be difficult arguments in relation to causation, remoteness and quantum, particularly in the current climate when one would argue that COVID-19, rather than any delay in insurer’s payment of a claim, has caused or exacerbated an insured’s loss.
Parties to non-consumer contracts are entitled to contract out of breaches of the section 13A implied term, except in relation to deliberate or reckless breaches of that term. A breach is deliberate or reckless if the insurer knew that it was in breach or did not care whether or not it was in breach. An insurer should check for such provision in the policy.
In order to validly contract out, however, certain transparency requirements need to be met:
- The insurer is required to have taken sufficient steps to draw the relevant provision (referred to as the ‘disadvantageous term’) to the insured’s attention before the insurance contract was entered into or any variation agreed
- The relevant provision must also be clear and unambiguous as to its effect.
It is important to note that the characteristics of the type of insured person in question and the circumstances of the transaction are taken into account when assessing whether the above requirements have been met.
Section 30 of the Enterprise Act 2016 also amended the Limitation Act 1980 to insert a new section 5A, which provides that actions for damages for late payment of insurance claims may not be brought after the expiration of 1 (one) year from the date on which the insurer has paid all sums due in relation to the insurance claim. In most cases, claims will be made before they are paid, but in the COVID-19 confusion, this may not always be the case.
Whether a claim for breach of the implied term in an insurance contract to pay claims within a reasonable time applies will depend upon the facts of any one case. To date there are no case precedents, but it is possible that insureds will look to run such cases in relation to COVID-19 claims, not least since the consequences for some may be financial collapse, which could lead to a hefty claim for damages. Insurers should be mindful, therefore, of claims handling practices, keep good records of those practices and claims handling decisions, take appropriate legal advice, and carefully monitor third parties such as TPAs and adjusters.